OGC Op. No. 03-01-27

The Office of General Counsel issued the following opinion on January 13, 2003, representing the position of the New York State Insurance Department.

Referral or finder fee from a premium finance agency to an insurance agent or broker

Question Presented

Under what circumstances may an insurance agent or broker accept a referral or finder fee from a premium finance agency to place a premium finance agreement with that premium finance agency?

Conclusion

If the insurance agent or broker were also licensed as a premium finance agency, it may accept the referral or finder fee in its capacity as a premium finance agency. If the insurance agent or broker is not so licensed as a premium finance agency, and the premium finance agency does not recoup from the insured the cost of the referral or finder fee that it proposes to pay to the insurance agent or broker, there is nothing under the Insurance Law that would prohibit the insurance agent or broker from accepting the fee. If the premium finance agency does recoup from the insured the cost of the referral or finder fee that it proposes to pay to an insurance agent or broker that is not licensed as a premium finance agency, the insurance agent may not accept the fee, but the broker may accept the fee if the insured authorizes the broker to receive the fee pursuant to a written compensation agreement in accordance with N.Y. Ins. Law § 2119(c)(1) (McKinney 2000).

Facts

A premium finance agency has proposed to pay a referral or finder fee to the inquirer’s company, which is a licensed property/casualty insurance broker, in regard to premium finance agreements for commercial property/casualty insurance contracted for by that premium finance agency. The inquirer’s company is not licensed as a premium finance agency. The inquirer’s inquiry focused on whether the New York Insurance Law would permit the inquirer’s company to accept that referral or finder fee from a premium finance agency.

While insurance agents and brokers are licensees of the New York Insurance Department, premium finance agencies are licensees of the New York Banking Department. The proposed agreement between the inquirer’s company and the premium finance agency is quoted below:

In order to induce Premium Financing Company A to fund premium finance agreements for <PRODUCER> and to receive a fee for these agreements, <PRODUCER> agrees to assign these agreements with limited recourse pursuant to New York Banking Law Section 566(2)(a). (Emphasis added)

The term "producer" means both insurance agents and brokers. Thus, this opinion will address whether either an insurance agent or broker may receive a referral or finder fee from a premium finance agency.

Analysis

N.Y. Banking Law § 566(2)(a) (LEXIS through 2002 legislation) states in pertinent part:

2. Notwithstanding any contrary provisions of the personal property law, banking law or other law . . . a premium finance agency may purchase or otherwise acquire a premium finance agreement, provided that it conforms to this article in all respects, from an insurance agent or broker or another premium finance agency with recourse against the agent, broker or agency on such terms and conditions as may be mutually agreed upon . . . . (Emphasis added)

While the New York Insurance Department does not opine on the New York Banking Law, the referral or finder fee agreement under the facts presented may not comply with N.Y. Banking Law § 566(2)(a) (LEXIS through 2002 legislation) because there would be "limited recourse" against the insurance agent or broker. 1 The Department offers no opinion as to whether the proposed agreement complies with the New York Banking Law and refers the inquirer to the New York Banking Department. For the purpose of this opinion, however, the Department will assume that there is an otherwise valid agreement between the premium finance agency and the insurance agent or broker.

Whether or not an insurance agent or broker may accept a referral or finder fee from a premium finance agency to place a premium finance agreement with that premium finance agency depends on the facts.

N.Y. Banking Law § 568(2) (LEXIS through 2002 legislation) states:

2. A premium finance agency, including an insurance agent or broker licensed as such, may, in a premium finance agreement, contract for, and if so contracted for, the holder of the agreement may charge, receive and collect a service charge, for financing or arranging the financing of premiums under the agreement, computed as provided in subdivision four.

Accordingly, the insurance agent or broker may accept the referral or finder fee in his capacity as a premium finance agency.

Where an insurance agent or broker is not licensed as a premium finance agency, and the premium finance agency does not recoup the cost of the referral or finder fee from the insured that it proposes to pay to the insurance agent or broker, the insured would not incur any indirect cost and, therefore, there is nothing under the Insurance Law that would prohibit the insurance agent or broker from accepting the fee.

Where an insurance agent is not licensed as a premium finance agency, but the premium finance agency recoups the cost of the referral or finder fee from the insured that it proposes to pay to the insurance agent, the Insurance Law does not authorize the insurance agent to accept the indirect payment of the fee from the insured for procuring the insurance.

Where an insurance broker is not licensed as a premium finance agency, and the premium finance agency recoups the cost of the referral or finder fee from the insured that it proposes to pay to the insurance broker, N.Y. Ins. Law § 2119(c)(1) (McKinney 2000) permits such fee if the insured signs a memorandum authorizing the indirect payment of the fee to the insurance broker for procuring the insurance and specifying or clearly defining the amount or extent of such compensation. Pursuant to N.Y. Ins. Law § 2119(c)(2) (McKinney 2000), the insurance broker must retain a copy of that memorandum for not less than three years after the services have been fully performed.

For further information you may contact Senior Attorney Robert Freedman at the New York City Office.

1Standard Premium Plan Corporation v. Wolf, 56 Misc.2d 522, 288 N.Y.S.2d 987 (Civ. Ct. N.Y. Co. 1968); Standard Premium Plan Corporation v. Hirschorn, 56 Misc.2d 687, 290 N.Y.S.2d 226 (Civ. Ct. N.Y. Co. 1968).